• The inflation environment remains low. The November CPI was lower than expected, and inflation over the past 12 months is 0.3 percent. Inflation excluding energy and fruits and vegetables indicates a lower basic inflation rate than in previous months. In the coming months, inflation is expected to stay low, but most one-year expectations and forecasts remained near the lower bound of the target range.
  • Since the previous interest rate decision, the shekel has been relatively stable against the dollar, while most other currencies strengthened against the dollar. However, during 2019, the shekel strengthened by 8.3 percent in terms of the nominal effective exchange rate, a development that continues to make it difficult to return inflation to the target range.
  • Most indicators of economic activity point to continued solid growth in the fourth quarter, and the labor market remains tight. However, the interim budget is expected to have a markedly contractionary effect in the first half of 2020, and there is continuing uncertainty regarding budgetary policy thereafter. According to the Research Department’s staff forecast, growth is expected to slow somewhat in 2020.
  • Global economic activity continues to slow, but it seems that the risks of a significant deterioration have declined in view of progress in the trade negotiations between the US and China and the results of the UK elections. Inflation remains low, but it appears that the process of enhanced monetary accommodation by the major central banks has reached its limit at this stage.


The Monetary Committee's assessment is that in view of the inflation environment in Israel, the monetary policies of major central banks, developments in the global economy and the risks to the domestic economy, and the development of the exchange rate, it will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and so that the economy will continue to grow strongly. Furthermore, the Committee is taking additional steps as necessary to make monetary policy more accommodative. The Bank of Israel continues to monitor developments in inflation, the real economy, fiscal policy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.

 

For the file of figures accompanying this notice, click here.​


The inflation environment remains low. The CPI reading for November declined by 0.4 percent, a greater decline than expected, so that year over year inflation remained below the target range. In the past 12 months, inflation was 0.3 percent (Figure 1 in the attached file of figures), and inflation excluding energy and fruit and vegetables stabilized at a low level, which may indicate a lower basic inflation rate than in previous months (Figure 2). Inflation of nontradable goods prices remained moderate, in view of the slowdown in the increase of the housing component, and inflation in the prices of tradable goods remained negative, in view of the decline in energy prices and the appreciation of the shekel. Inflation is expected to remain low in the coming months, but most one-year forecasts and expectations remain around the lower bound of the target range (Figure 4). The Research Department’s staff forecast indicates that inflation in 2020 is expected to be 1 percent, 0.2 percent lower than in the previous forecast. Expectations derived from CPI financial contracts appear to have declined moderately in recent months. Medium-and long-term forward inflation expectations derived from the bond market remained largely stable since the previous interest rate decision, and have increased slightly in recent days (Figure 5). Since the previous interest rate decision, the shekel was relatively stable against the dollar, while most currencies strengthened against the dollar. However, over the course of 2019, the shekel strengthened by 8.3 percent in terms of the nominal effective exchange rate (Figure 6), which continues to make it difficult to return inflation to the target range.

 

Most indicators of economic activity show that in the fourth quarter, the economy continued to grow solidly. This is substantiated by the Business Tendency Survey for December and the Companies Survey for the fourth quarter (Figure 13), the Composite State of the Economy Index for November (Figure 14), and the Purchasing Managers Index. Goods exports were flat in October and November, while services exports continued to grow rapidly in October (Figure 15). In contrast, the Consumer Confidence Index declined in October and in November. The labor market remains tight: The unemployment rate remained low, while the employment and participation rates increased (Figure 17), and wage increases continue despite a moderate decline in the job vacancy rate and a halt in the increase in employee posts. The interim budget is expected to have a markedly contractionary effect in the first half of 2020, even in view of the path of government debt repayment, and uncertainty remains regarding budgetary policy thereafter and its implications for economic activity and inflation. According to the Research Department’s staff forecast, growth is expected to slow somewhat in 2020 as a result of the continued slowdown in world trade and the budgetary contraction. GDP is expected to grow by 2.9 percent, of which about 0.3 percentage points is due to the one-off effect of the start of natural gas production from the Leviathan field. In 2021, GDP is expected to grow by 3.2 percent.

 

Equity indices in Israel were relatively stable since the previous interest rate decision, despite equity market increases abroad. Long-term government bond yields declined since the previous interest rate decision, in contrast with the continued increase in yields in Europe and the US (Figure 8).

 

Home prices continued to increase moderately, and in the past year they have increased by 2.6 percent. The number of home purchases increased, led by first-home purchasers. Mortgage volume continued to expand, and mortgage interest rates continued to decline.

 

The global economy continues to slow, but several indicators point to a possible moderate improvement in the coming months. Forecasts by investment houses were stable regarding global growth in 2020 and 2021, following a long period of downward revisions in growth forecasts (Figure 20). With the exception of the United States, most fourth quarter country statistics indicated a continued slowdown in the growth rate, with the main weakness focused on manufacturing. The slowdown in world trade continues (Figure 21), but the risk of a significant worsening has declined in view of progress in trade negotiations between the US and China and the results of the UK election. Inflation remained lower than the central banks' guiding targets (Figure 23), but it appears that the process of enhanced monetary accommodation by the major central banks has reached its limit at this stage. In the financial markets, the price increases in equity indices have continued (Figure 26). In the US, the Federal Reserve kept the federal funds rate unchanged, and signaled that the rate is expected to remain at its current level unless there is a significant change in the state of the economy. Growth surprised to the upside in the fourth quarter as well, and the trade agreement that is taking shape with China may contribute to a recovery in manufacturing. In Europe, growth remains moderate, mainly in Germany and Italy, and the manufacturing sector continues to weigh on activity. The ECB left its interest rate unchanged, and is expected to leave its policy in place for a long time. In Japan, leading indicators point to a slowing of growth in the fourth quarter, after the increase in VAT. Data on activity in China were positive, but the long-term trend of moderation continues. Oil prices increased in view of a reduction of supply and an expected increase in demand (Figure 24).

 

 

 

The minutes of the monetary discussions prior to this interest rate decision will be published on January 23, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, February 24, 2020.